After all the bills are paid, we sometimes find ourselves with a surplus of cash and wondering how best to use it. Your options for available cash fall into three categories: spend it, invest it, or pay down debt. Trying to balance saving as much as possible while still trying to pay down a mortgage can be stressful and somewhat confusing. While there is no one-size-fits-all solution for allocating cash, there are tried and true principles that could help you make the most of your money.
What You Need to Know
When people come into some extra cash the first instinct may be to pay down debt. While this can be a no-brainer when dealing with high interest debt, such as credit cards, this might not be the best decision for a mortgage. Mortgages are low interest debt. Therefore, it can sometimes make more sense to invest the money where your rate of return in the long run could exceed the interest rate on your mortgage. By contributing into your RRSP you can make this is a win-win situation. The RRSP contribution will grow and compound on a tax-deferred basis. You will also receive a tax refund that can help [ay down a lump sum on your mortgage to help you get even further ahead.
When comparing a TFSA contribution versus a mortgage, however, the same may not be true. While a TFSA does grow tax free, it is funded with after-tax dollars and no tax refund is received for your contributions. If your RRSPs are maxed out and you are trying to decide between your mortgage and TFSA, then your decision may simply come down to your rate of return. For example, if your mortgage rate is 3% and you think that you can only earn 2.5% in your TFSA, the mortgage would be the best bet. Conversely, if you expect your TFSA to return over 5%, then the TFSA may be the best option.
The Bottom Line
The best strategy for you depends on your personal financial situation. Your advisor can help you weigh the pros and cons in a way that will be tailored specifically to your situation.